There are a large number of statutes that potentially apply to any business providing financial services or products in New Zealand. We are aware from prosecutions by regulators and from assistance that we have provided to clients, that many people are unaware of the full compliance requirements that relate to their business. In some cases, businesses may comply with one statute, but are unaware that there are other statutes that apply.
We consider that the large number of statutes that can apply to financial service providers pose significant financial risks for businesses and that all businesses should get thorough advice on whether their business practices and contracts comply with all relevant legislation. To do otherwise risks significant financial penalties, even if the conduct was wholly inadvertent.
In this article, we have summarised some of the many statutes that may be applicable to financial service providers or people offering or dealing in financial products. Primarily, we hope that this summary clearly indicates why legal advice should definitely be sought in these areas, both because there are numerous statutes that may apply to your business and understanding how to comply with all of them can be quite technical, but also because the penalties under all of these statutes are potentially very significant.
The Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSP Act) requires that anyone who provides a "financial service" must be registered as a financial service provider (unless they are exempt).
"Financial Services" is very widely defined and includes (among other things):
There are very few exemptions under the Act. The exemptions include people who act in a different capacity (such as lawyers and accountants), where any financial services are only provided as an incidence of the legal or accountancy services being provided.
This means that most businesses that provide financial services will need to register as a Financial Service Provider – and as a requirement of that registration, join a dispute resolution scheme offered by a licensed scheme provider. McVeagh Fleming has assisted a number of clients with registration, as well as reviewing and drafting client documentation that ensures disclosure and contractual terms are consistent with the FSP Act and the dispute scheme that our clients have elected, and are bound by.
More importantly, it appears from our review of a number of business operators that many companies that have registered as financial service providers are not aware that they additionally need to comply with other, quite technical legislation.
For example, if you register as a financial service provider in relation to exchanging foreign currency, you might also be offering derivatives(if the foreign exchange relates to dealing in currency differences rather than actual currency exchange). Dealers in derivatives need to separately obtain a licence from the Financial Markets Authority to comply with the Financial Markets Conduct Act 2013 ("FMCA"). A substantial number of other financial products that a financial service provider may provide also require compliance with the FMCA and individuals or businesses that do not comply with the FMCA may face very substantial penalties.
The FMCA generally speaking applies to all people providing "financial products". The FMCA has provisions that apply to a very wide range of things that people might invest in, including shares, managed investments, derivatives (which include futures contracts, options, contracts for difference and other similar transactions) and require that offerors/issuers of those types of investment product comply with the requirements of the FMCA. There are some exemptions and savings provisions under the FMCA, but it is very lengthy and technical legislation and we consider that people must take legal advice to ensure they comply with the FMCA.
Providing advice relating to investment products ancillary to financial services offered will also usually require that the business or person providing such advice complies with the Financial Advisers Act 2008 ("FAA") – this Act has reasonably substantial requirements to ensure that a person is appropriately authorised or licensed before they can provide such advice.
Likewise, providing credit under consumer credit contracts requires compliance with the Credit Contracts and Consumer Finance Act 2003 ("CCCFA") which has had some material amendments in June 2015. Anyone providing credit contracts prior to that date that has not reviewed their documentation subsequently should do so, since most credit contracts drafted prior to that date are unlikely to comply with the CCCFA as amended.
An increasing number of companies that provide credit have fallen afoul of the CCCFA, often by utilising contracts of competitors or that they have found online only to find the contracts did not in fact comply with the CCCFA, or were not appropriately modified to reflect their own lending practices and were misleading as a consequence. The penalties companies have recently faced for breaches of the CCCFA have been substantial. Again, we consider all commercial lenders should take legal advice, since it is very easy to inadvertently breach the CCCFA.
In addition to the requirements of the CCCFA, companies need to be very aware of the requirements of the Fair Trading Act 1986 ("FTA"). The FTA was expanded in scope (from March 2015) to provide for "Unfair Contract Terms" in standard form contracts. Standard form contracts are essentially consumer contracts provided in a standard form the provider uses, where the terms of the contracts are not subject to effective negotiation between parties (they are offered on a "take it or leave it" basis). The FTA also applies to all business a financial service provider or offeror of financial product undertakes. The FTA also applies generally to any misleading or deceptive conduct in trade and is frequently pleaded in contract litigation. In addition to the FTA, many of the statutes mentioned in this article also have additional fair dealing or fair trading provisions that need to be understood and adhered to.
There are a number of incidental statutes that many businesses handling client money or providing credit may need to comply with. The Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 has very wide application and applies to a fairly large number of businesses involved in providing financial services and/or offering financial products and requires those businesses have appropriate client due diligence processes in place and a number of other compliance requirements, including risk assessment and audit requirements. Not complying with this statute, or any of the other statutes mentioned in this article can have very serious consequences for businesses and individuals that are not compliant.
In summary, if you are providing a financial service or dealing in financial products, there will be more than one statute that you will need to comply with – not simply the one that most directly relates to the business or industry you are involved with. Many of these have technical or complex requirements. If you are not absolutely certain that your business has complied with all its obligations that we, as lawyers, are trained to advise on and can assist you with. We recommend you seek this advice, since the penalties for non-compliance are high and the rules around providing financial services and financial products in New Zealand have become a lot more complex in recent years.
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© McVeagh Fleming 2017
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.